NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

A Theory of Capital Controls as Dynamic Terms-of-Trade Manipulation

Arnaud Costinot, Guido Lorenzoni, Iván Werning

NBER Working Paper No. 17680
Issued in December 2011
NBER Program(s):   IFM   ITI

This paper develops a simple theory of capital controls as dynamic terms-of-trade manipulation. We study an infinite horizon endowment economy with two countries. One country chooses taxes on international capital flows in order to maximize the welfare of its representative agent, while the other country is passive. We show that capital controls are not guided by the absolute desire to alter the intertemporal price of the goods produced in any given period, but rather by the relative strength of this desire between two consecutive periods. Specifically, it is optimal for the strategic country to tax capital inflows (or subsidize capital outflows) if it grows faster than the rest of the world and to tax capital outflows (or subsidize capital inflows) if it grows more slowly. In the long-run, if relative endowments converge to a steady state, taxes on international capital flows converge to zero. Although our theory emphasizes interest rate manipulation, the country's net financial position per se is irrelevant.

You may purchase this paper on-line in .pdf format from SSRN.com ($5) for electronic delivery.

Information about Free Papers

You should expect a free download if you are a subscriber, a corporate associate of the NBER, a journalist, an employee of the U.S. federal government with a ".GOV" domain name, or a resident of nearly any developing country or transition economy.

If you usually get free papers at work/university but do not at home, you can either connect to your work VPN or proxy (if any) or elect to have a link to the paper emailed to your work email address below. The email address must be connected to a subscribing college, university, or other subscribing institution. Gmail and other free email addresses will not have access.

E-mail:

Machine-readable bibliographic record - MARC, RIS, BibTeX

Document Object Identifier (DOI): 10.3386/w17680

Published: Arnaud Costinot & Guido Lorenzoni & Iv�n Werning, 2014. "A Theory of Capital Controls as Dynamic Terms-of-Trade Manipulation," Journal of Political Economy, University of Chicago Press, vol. 122(1), pages 77 - 128. citation courtesy of

Users who downloaded this paper also downloaded these:
Farhi and Werning w18199 Dealing with the Trilemma: Optimal Capital Controls with Fixed Exchange Rates
Magud, Reinhart, and Rogoff w16805 Capital Controls: Myth and Reality - A Portfolio Balance Approach
Aizenman, Edwards, and Riera-Crichton w17692 Adjustment patterns to commodity terms of trade shocks: the role of exchange rate and international reserves policies
Magud, Reinhart, and Vesperoni w17670 Capital Inflows, Exchange Rate Flexibility, and Credit Booms
Coeurdacier and Rey w17691 Home Bias in Open Economy Financial Macroeconomics
 
Publications
Activities
Meetings
NBER Videos
Data
People
About

Support
National Bureau of Economic Research, 1050 Massachusetts Ave., Cambridge, MA 02138; 617-868-3900; email: info@nber.org

Contact Us